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LEARNING OUTCOMES
At the end of this module, you are expected to:

1. Classify employees as to function and taxability;

2. Identify the non-taxable compensation income;
3. Apply the limits on de minimis benefits and determining the tax treatment for the
excess;
4. Identify the components of 13th month pay and other benefits and determine taxability
by applying the exemption threshold;
5. Identify the components of regular and supplementary compensation; and
6. Identify the relevant returns for compensation income on both parts of the employer and
employee.

Pre-Activity
Try to answer the following questions.
1. Remembering from your BAINTE1X class, what are the items of compensation
income?
2. How did you compute for the monthly withholding tax on compensation when you
studied payroll accounting?
3. What differentiates regular and supplementary compensation?
4. What do you think does the term ‘de minimis’ mean?

TYPES OF EMPLOYEES
It is to be noted that one should know where an employee is classified as there are different tax
rules for each classification.

As to Function
1. Managerial employees - Those who are given powers or prerogatives to lay down and
execute managerial policies and/or to hire, transfer, suspend, lay-off, recall, discharge,
assign or discipline employees
2. Supervisory employees - Those who effectively recommend such managerial actions if
the exercise of such authority is not merely routinary or clerical in nature but requires
the use of independent judgment
3. Rank-and-file employees - Those who hold neither managerial nor supervisory
functions
As to Taxability
1. Minimum wage earners - Employees who are recipients of minimum wage. They are
exempt from income tax on their compensation.
2. Regular employees - Employees who are subject to the regular progressive income tax

As to Employer
1. Private Employee – one that is employed in the private sector. This employee normally
pays the SSS Contributions.
2. Government Employee – one that is employed by any government body including its
political subdivisions. This employee normally pays the GSIS Contributions. Its basic
pay is normally based on salary grades.

TAX MODEL ON COMPENSATION INCOME

Let us look at a portion of BIR Form 2316 to see the tax model on compensation income.

Let us assume that there is only one employer connected with employee and no other sources
income on his part during the taxable year. We can further simplify the tax model as:
Gross Compensation Income xx
Non-Taxable Compensation Income (xx)
Taxable Compensation Income xx

Tax Due xx
Tax Withheld (xx)
Tax Payable xx

Remember that purely employed individuals may qualify for the substituted filing of income tax
return. This is because normally, its employer annualizes all its taxable compensation income and
this would result to a nil amount of tax still due.

To illustrate the flow of the topics in this module and how it relates to the tax model. You may
look at the diagram below.
Firstly, we will determine those items which are non-taxable for us to only consider those taxable
items later on. We will then work our way up to compute for the taxable compensation income.

EXEMPT COMPENSATION INCOME

Let us again look at Form 2316 to identify the items of exempt compensation income.

Basic Salary
This includes the P250,000 exemption threshold which is the first bracket in the progressive tax
table. This should also include the Statutory Minimum Wage of a minimum wage earner.

It should be noted, however, that if the taxable regular and supplementary compensation is
less than P250,000, the actual amount will be added in lieu of the P250,000.

Supplementary Compensation of MWE

This would include Holiday Pay, Overtime Pay, Night Shift Differential pay and Hazard Pay.
13th Month Pay and Other Benefits
As provided by the tax code, the first P90,000 is exempt, any excess over this amount is part of
Supplementary Compensation. The composition of this item will be discussed later.

De Minimis Benefits
This would include petty benefits which are within the limits provided by RR 5-2011. This is
further discussed in this module.

Mandatory Contributions
Employee Share on the mandatory contributions to SSS, GSIS, PHIC and HDMF are non-taxable.
The same goes to union dues.

Salaries and Other Forms of Compensation

This is the catch-all basin for all other exempt benefits as provided by tax and special laws. These
are, but not limited to, the following:

a. Exempt retirement benefits under RA 7641 including exempt retirement gratuities to

government officials and employees
b. Exempt termination benefits
c. Benefits from the United States Veterans Administration
d. Social security, retirement gratuities, pensions, and similar benefits from foreign
government agencies and other institutions, private or public
e. Benefits from SSS, under the SSS Act of 1954, as amended f. Benefits from GSIS under
the GSIS Act of 1937, as amended
f. Personal Economic Relief Allowance of government employees
g. Benefits exempt under treaty or international agreements
h. Benefits necessary to the trade, business, or conduct of profession of the employer
i. Benefits for the convenience or advantage of the employer

DE MINIMIS BENEFITS
De minimis benefits are facilities or privileges such as entertainment, medical services, or
courtesy discounts on purchases that are of relatively small value and are furnished by the
employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his
employees. De minimis benefits are petty fringe benefits exempt from income tax. As originally
conceived, other petty fringe benefits which fall within the purview of de minimis even if not part
of the de minimis list are normally treated as de minimis and are also exempt from income tax.
However, the BIR and the Department of Finance changed the rule wherein the term "de minimis
benefits" was restricted to mean only the following:
De Minimis Benefit Limit
Monetized unused vacation leave credits of private employees 10 days per year
Monetized unused vacation and sick leave credits of government
-no limit-
employees
Medical Cash allowance to dependents P1,500 per semester
Rice subsidy P2,000 per month
Uniform and Clothing Allowance P6,000 per year
Actual Medical Assistance P10,000 per year
Laundry Allowance P300 per month
Employee Achievement Award, in the form of non-cash tangible
P10,000 per year
property
Christmas and Anniversary gifts P5,000 per year
Daily meal allowance for overtime work and night or graveyard
25% of minimum wage
shift
Benefits received under Collective Negotiation
Agreement/Collective Bargaining Agreement and Productivity P10,000 per year
Enhancement Incentive schemes

Take note that if the benefits received under CNA/CBA and PEI schemes which exceed P10,000
shall be fully considered as excess de minimis.

Excess De Minimis Benefits

Amounts in excess of these regulatory limits are called excess de minimis benefits.

Taxable De Minimis Benefits

This includes the excess de minimis benefits and other benefits of relatively small value that not
included in the list of de minimis benefits under RR 11-2018.

Treatment
The table below summarizes the treatment for the taxable de minimis benefits basing on the type
of employee as to their function.

Function Treatment
Managerial or Supervisory Subject to Fringe Benefit Tax (Final Tax)
Rank-and-File Part of 13th Month Pay and Other Benefits
Since those taxable de minimis benefits earned by employees occupying managerial or
supervisory functions is subject to FBT which is a form of final tax, such is not reported in the
Form 2316.

Illustration 10.1
Lula is paid at a P750 daily rate. In addition to the basic pay, she received the following during
the year.
Monetized unused vacation days 11 days
Monetized unused sick days 8 days
Medical cash allowance to dependents P1,000 per quarter
Rice subsidy P2,200 per month
Uniform allowance P5,000
Medical allowance for healthcare needs of Lula P8,500
Laundry allowance P350 per month
Cash Achievement Award P5,000
Anniversary Gift P6,000
Collective bargaining agreement benefits P10,000

Scenario 1: Lula is a private employee.

Actual Limit Excess
Monetized unused vacation days 8,250 7,500 750
Monetized unused sick days 6,000 - 6,000
Medical cash allowance to dependents 4,000 3,000 1,000
Rice subsidy 26,400 24,000 2,400
Uniform allowance 5,000 6,000 -
Medical allowance 8,500 10,000 -
Laundry allowance 4,200 3,600 600
Cash Achievement Award 5,000 - 5,000
Anniversary Gift 6,000 5,000 1,000
Collective bargaining agreement benefits 10,000 10,000 -
Total 83,350 16,750
The amount of P66,600 (P83,350-P16,750) will be exempt as these are within the limits. It will be
reflected on item 33 on Form 2316. The taxable de minimis benefits amounting to P16,750 will be part
of 13th Month Pay and Other Benefits if Lula is a rank-and-file employee or subject to Fringe Benefit Tax
if she holds either managerial or supervisory position.
Scenario 2: Lula is a government employee.
Actual Limit Excess
Monetized unused vacation days 8,250 Unlimited -
Monetized unused sick days 6,000 Unlimited -
Medical cash allowance to dependents 4,000 3,000 1,000
Rice subsidy 26,400 24,000 2,400
Uniform allowance 5,000 6,000 -
Medical allowance 8,500 10,000 -
Laundry allowance 4,200 3,600 600
Cash Achievement Award 5,000 - 5,000
Anniversary Gift 6,000 5,000 1,000
Collective bargaining agreement benefits 10,000 10,000 -
Total 83,350 10,000
The amount of P73,350 (P83,350-P10,000) will be exempt as these are within the limits. It will be
reflected on item 33 on Form 2316. The taxable de minimis benefits amounting to P9,000 will be part of
13th Month Pay and Other Benefits if Lula is a rank-and-file employee or subject to Fringe Benefit Tax
if she holds either managerial or supervisory position.

13TH MONTH PAY AND OTHER BENEFITS

The following are the items of this category.

1. 13th month pay, 14th month pay, 15th month pay, etc.
2. Christmas bonus of private employees
3. Cash gifts other than Christmas or Anniversary gifts of private employees
4. Additional Compensation Allowance (ACA) of government employees
5. Other fringe benefits of rank-and-file employees
a. Taxable de minimis benefits
b. Personal expenses shouldered by the employer

The exemption threshold of the aggregate amount of these items is P90,000. This means that that
first P90,000 is exempt and any excess is added as part of Supplementary Compensation reported
in item 46 under Form 2316.
Illustration 10.2
Luna received the following benefits during the year:
13th Month Pay 30,000
14th Month Pay 30,000
Excess de minimis benefits 25,000
Personal expenses reimbursed by the company 10,000
Christmas Gift 5,000

Scenario 1: Luna is a private rank-and-file employee

The Christmas gift is part of de minimis benefits which was within the limits, therefore, the 13 th Month
Pay and Other Benefits is:
13th and 14th Month Pay 60,000
Excess de minimis benefits 25,000
Personal expenses reimbursed by the company 10,000
13th Month Pay and Other Benefits 95,000
The first P90,000 is non-taxable to be reported under item 32 in Form 2316. The excess of P5,000 is
taxable to be reported under item 46 un Form 2316.

Scenario 2: Luna is a private supervisory employee

The Christmas gift has the same treatment as Scenario 1. The excess de minimis and personal expenses
are subject to Fringe Benefit Tax, thus, the sum of 13th and 14th Month Pay is the total 13th Month Pay
and Other Benefits.
The whole amount of P60,000 is exempt to be reported under item 32 in Form 2316.

Scenario 3: Luna is a government rank-and-file employee

The Christmas gift is part of 13th MP&OB, therefore, the 13th Month Pay and Other Benefits is:
13th and 14th Month Pay 60,000
Christmas Gift 5,000
Excess de minimis benefits 25,000
Personal expenses reimbursed by the company 10,000
13th Month Pay and Other Benefits 100,000
The first P90,000 is non-taxable to be reported under item 32 in Form 2316. The excess of P10,000 is
taxable to be reported under item 46 un Form 2316.
Scenario 4: Luna is a government supervisory employee
The Christmas gift has the same treatment as Scenario 3. The excess de minimis and personal expenses
are subject to Fringe Benefit Tax, therefore, the 13th Month Pay and Other Benefits is:
13th and 14th Month Pay 60,000
Christmas Gift 5,000
13th Month Pay and Other Benefits 65,000
The whole amount of P65,000 is exempt to be reported under item 32 in Form 2316.

SUPPLEMENTARY COMPENSATION
These are additional compensation which are performance-based remunerations. These are given
with or without regard to the payroll period. The following are the items of supplementary
compensation.

Overtime, Holiday, Hazard, and Night Differential Pay

These constitute additional compensation, except when derived by a minimum earner.

Taxable 13th Month Pay and Other Benefits

This is the excess of the 13th MP&OB over the P90,000 exemption threshold.

Commissions, Emoluments, Honoraria

Commissions are incentives intended to stimulate sales. These may be given as a profit sharing
or performance bonus. Emoluments pertain to any pay in general while honoraria are additional
payments for attending to special tasks or assignments.

Living Quarters or Meals

If an employee receives free living quarters or meals in addition to salary for services rendered,
the value to the employee of such living quarters or meals is included in compensation income.
However, when the same was furnished to an employee for the convenience of the employer or
out of necessity of the employer's business, the value thereof is not compensation income, but a
business expense.

Stock Option Plans

Under various stock option plans, employees are given the privilege to buy shares at an agreed
exercise price after meeting stipulated vesting conditions. The option will have value when the
stock of the employer increases in value above the exercise price at exercise date. The value of the
option is the discount at exercise date. In the past, stock options were not taxed at exercise date
under the view that the discount becomes realized only when the stocks are disposed. Under
current tax rules, the discount (i.e. market price - exercise price) at exercise date is viewed as
compensation in kind. The gains from the exercise of stock options constitute a taxable
compensation income, unless they qualify as fringe benefits subject to final tax.

Fees
Fees are received by an employee for the services rendered to the employer including a director's
fee of the company; fees paid to the public officials, such as clerks of court or sheriffs for services
rendered in the performance of their official duty over and above their regular salaries. •

Legal fees paid by a union on behalf of its president constitute compensation. Marriage fees,
baptismal offerings, sums paid for conducting masses for the dead, and other contributions
received by a clergyman, evangelist, or religious worker for services rendered are considered
compensation.

Taxable Retirement and Separation Pay

Those which did not meet requisites for exemption are taxable as supplementary compensation.

Profit Sharing or Taxable Bonus

Profit sharing is a reward for churning the business to post a profit. It is a compensation for
controlling all the factors that influence profit such as marketing and sales, productivity, and
administrative factors. It is a reward which can be enjoyed by individual employees such as
salesmen, division heads, key officers, or by all employees collectively. Bonuses are supplemental
or additional compensation. However, if they are linked solely to productivity under the
productivity incentive plan of the employer pursuant to RA 6971, they should be considered as
de minimis benefits.

Let us look at its designated portion in the Form 2316 on how they are reported.
Those which are not specifically identified in the return can be specified under item 49.

REGULAR COMPENSATION
The regular compensation includes fixed remunerations due to be received by an employee every
period such as:

1. Basic salary
2. Fixed allowances such as cost-of-living allowance, fixed housing allowance,
representation, transportation, and other allowances paid to an employee every payroll
period

Fixed Allowances are those which are fixed in amounts and regularly received as part of the
basic monthly, bi-weekly, weekly or daily salaries or wages are part of regular compensation.
This applies even if a portion of the allowances are actually used in the employer's business.

Exception Rule
a. Ordinary and necessary allowances for travelling, representation or entertainment
expense of employees incurred in the pursuit of the employer' trade, business or
profession.
b. The expense is subject to accounting or liquidation.
c. Any excess advances are returned to the employer.

Hence, variable and liquidated allowances are not subject to tax. However, amounts of
allowances that are retained by the employee for himself shall be considered compensation.

Paid Absences
The paid absences of an employee applied against his vacation or sick leave credits which are
normally received as part of the regular salary is part of the regular compensation.

Let us look at the portion designated for Regular Compensation on Form 2316.

Similar to supplementary compensation, those items which are not specifically identified as
regular compensation income in the form can be specified under item 42.

FLOWCHART OF TAX TREATMENTS

Following is a flowchart of the tax treatments to guide you. When using this flowchart, it is
imperative that you know where a certain item of compensation is classified.
Illustration 10.3
Jackie earned the following during the taxable year.
Monthly Basic Pay, net of P3,500 mandatory deductions 26,500
Overtime Pay 12,000
Collective Negotiation Agreement 25,000
Midyear Bonus (13th Month Pay) 30,000
Yearend Bonus (14th Month Pay) 30,000
Cash Gift 5,000
Clothing Allowance 6,000
Monetized Unused Vacation Days (five days) 7,500
Monetized Unused Sick Days (three days) 4,500
Anniversary Gift 5,000
Additional Compensation Allowance 6,000
Personal Economic Relief Allowance 18,000
Scenario 1: Jackie is a government rank-and-file employee.
Actual Limit Taxable
Monetized Unused Vacation Days 7,500 Unlimited -
Monetized Unused Sick Days 4,500 Unlimited -
Anniversary Gift 5,000 5,000 -
Collective Negotiation Agreement 25,000 10,000 15,000
Clothing Allowance 6,000 6,000 -
Taxable De Minimis 15,000
Midyear Bonus 30,000
Yearend Bonus 30,000
Cash Gift 5,000
Additional Compensation Allowance 6,000
13th Month Pay and Other Benefits 86,000
Exemption Threshold 90,000
Taxable 13th Month Pay and Other Benefits -
Overtime Pay 12,000
Supplementary Compensation 12,000
Regular Compensation (Basic Pay) (26,500 x 12) 318,000
Total Taxable Compensation Income before P250,000 threshold 330,000
To conform with the format of the Form 2316, it shall be reported as
Gross Compensation Income 509,000
Less: Non-Taxable/Exempt Income (179,000 + 250,000) 429,000
Gross Taxable Compensation Income 80,000

Tax Due 16,000

Less: Tax Withheld (assuming taxes were properly withheld) 16,000
Tax Payable -

Scenario 2: Jackie is a government supervisory employee.

The same taxable income and tax due will be computed as the only difference would be the treatment of
the P15,000 taxable de minimis which would be subject to Fringe Benefits Tax. Since the remaining
P71,000 13th MP&OB is below the exemption threshold, there is no effect on the taxable income. This
amount, however, will not be reported in Form 2316. As such,
Gross Compensation Income 494,000
Less: Non-Taxable/Exempt Income (164,000 + 250,000) 414,000
Gross Taxable Compensation Income 80,000
Scenario 3: Jackie is a private rank-and-file employee.
The same taxable income and tax due will be computed. The only difference with Scenario 1 is that the
Cash Gift will be added with the anniversary gift which will then create a P5,000 excess de minimis on
top of the previous amount of P20,000. Since the total 13th MP&OB is still below the exemption
threshold, there would be no effect on the taxable income. The same presentation for Form 2316 is
expected.

Scenario 4: Jackie is a private supervisory employee.

The same taxable income and tax due will be computed. As discussed in Scenario 3, the cash gift will
turn into an excess de minimis benefit which will be subject to Fringe Benefit Tax. The remaining 13 th
MP&OB of P66,000 is still below the exemption threshold, leading to no effect on the taxable income.
The summary in Form 2316 would look like this:
Gross Compensation Income 489,000
Less: Non-Taxable/Exempt Income (159,000 + 250,000) 409,000
Gross Taxable Compensation Income 80,000

MINIMUM WAGE EARNER

A minimum wage earner refers to a worker in the private sector who is paid the minimum wage
or to an employee in the public sector with compensation income of not more than the statutory
minimum wage (i.e., those with salary grade 1 to 3) in the non-agricultural sector where he or she
is assigned. The statutory minimum wage refers to rate fixed by the Regional Tripartite Wage and
Productivity Board of the Department of Labor and Employment or P5,000/month or
P60,000/year, whichever is higher.

As discussed previously, their Basic, Holiday, Hazard, Overtime and Night Differential Pays are
non-taxable despite presence of other forms of income.

Rules on Change in Status

1. When an employee becomes a minimum wage earner during the year, he/she shall be
subject to income tax only on compensation earned before becoming a minimum wage
earner.
2. When an employee ceases to be a minimum wage earner during the year, due to
increase in salary, only the income for the rest of the year is taxable.

COLA Treatment
COLA forms part of statutory minimum wage, thereby, it is exempt.
Illustration 10.4
Tiana was a minimum wage earner from January 1 to June 30 of the taxable year. She was
promoted effective July 1 and was given a salary rate higher than the statutory minimum wage.
The following are the benefits she received during the year.
Jan 1 – Jun 30 Jul 1 – Dec 31
Monthly Basic Pay 9,000 15,000
13th Month Pay - 12,000
Rice Subsidy 6,000 6,000
Medical Allowance to Dependent 1,000 2,500
Holiday Pay 2,000 4,000
Overtime Pay 5,000 7,000
Commission 45,000 78,000
Monthly Mandatory Deductions 3,000 4,000

Her taxable income for the year would be computed as follows:

Actual Limit Excess
Rice Subsidy 12,000 24,000 -
Medical Cash Allowance (Jan-Jun) 1,000 1,500 -
Medical Cash Allowance (Jul-Dec) 2,500 1,500 1,000
Total Taxable de minimis 1,000
13th Month Pay 12,000
13th Month Pay and Other Benefits 13,000
Exemption Threshold 90,000
Taxable 13th Month Pay and Other Benefits -
Holiday Pay 4,000
Overtime Pay 7,000
Commission 123,000
Supplementary Compensation 134,000
Regular Compensation (90,000-4,000) 86,000
Taxable Compensation Income before P250,000 threshold 220,000
To conform with the format of the Form 2316, it shall be reported as:
Gross Compensation Income 312,500
Less: Non-Taxable/Exempt Income (92,500 + 220,000*) 312,500
Gross Taxable Compensation Income -
Since the taxable compensation income before the P250,000 threshold of P220,000 is lower than the
exemption threshold, this is the amount added to the P92,500 non-taxable income.
SUBSTITUTED FILING
As discussed in Module 4, pure compensation income earners may be relieved from the
obligation to file their annual income tax return if they have no taxable income from other sources
other from their lone employer. The employee may avail of the substituted filing system wherein
the employer shall withhold the income tax of the employee's compensation. The Form 1700,
however, is required if the employee has other taxable income or has more than one employer,
either concurrent or successive, during the year.

Illustration 10.5
Pri Lance has two concurrent employers during the taxable year, both of which are not
knowledgeable of Pri’s employ on the other. He does not hold any managerial or supervisory
position on either employer. He received the following benefits during the year.
Employer A Employer B
Basic Pay 140,000 380,000
13th Month and Other Benefits 50,000 85,000
Overtime Pay 16,000 -
Holiday Pay 12,000 28,000
Commission 60,000 -
Tax Withheld - 32,000

More likely, the employers will treat his income as being earned only at their company. Pri would then
consolidate such for the filing of Form 1700.
2316 (A) 2316 (B) 1700
13th Month Pay and Other Benefits 50,000 85,000 135,000
Exemption Threshold 90,000 90,000 90,000
Taxable 13th MP&OB - - 45,000
Overtime Pay 16,000 - 16,000
Holiday Pay 12,000 28,000 40,000
Commission 60,000 - 60,000
Supplementary Compensation 88,000 28,000 161,000
Regular Compensation 140,000 380,000 520,000
Taxable Compensation Income 228,000 408,000 681,000
His Form 2316 from both employers would look like this:
Employer A Employer B
Gross Compensation Income 278,000 493,000
Less: Non-Taxable/Exempt Income *278,000 335,000
Gross Taxable Compensation Income - 158,000
Employer A Employer B
Tax Due - 32,000
Tax Withheld - 32,000
Tax Payable - -
*Take note that the taxable compensation income is less than the P250,000 exemption threshold.

In the Form 1700, however, the P250,000 is not included reported as exempt compensation.
Gross Compensation Income (278,000+493,000) 771,000
Less: Non-Taxable/Exempt Income (the threshold for 13thMP&OB) 90,000
Gross Taxable Compensation Income 681,000

Tax Due 100,250

Less: Tax Credits (Tax Withheld) 32,000
Tax Payable 68,250

FILING AND DEADLINE OF RELEVANT FORMS

The following are the relevant forms for compensation income.

Deadline
Form Name
Manual Filing eFPS Filing
Monthly Remittance Return of On or before the 11th-15th day
Income Taxes Withheld on tenth (10th) day of following
Compensation the following month withholding month
in which depending on the
withholding was taxpayer’s line of
1601C
made business
Except for December Except for December
Return which is due return which is
on January 15 generally due on
January 20
Annual Information Return of On or before January 31 of the year
Income Taxes Withheld on following the calendar year in which the
1604C
Compensation compensation payment and other income
payments were paid or accrued
Certificate of Compensation To be issued to payee on or before January
2316 Payment / Tax Withheld for 31 of the succeeding year in which the
compensation was paid, or in cases where
Compensation Payment with or there is termination of employment, it is
Without Tax Withheld issued on the same day the last payment of
wages is made.

References:
Banggawan, R. (2019). Income Taxation. Pasay City: Real Excellence Publishing.
Valencia, G. & Roxas, E. (2016). Income Taxation. Baguio City: Valencia Educational Supply.
Reyes, V. (2019). Income Tax Law and Accounting under the TRAIN Law. Manila: GIC Enterprises & Co., Inc.
Ampongan O. (2018). Income Taxation. Mandaluyong City: Millennium Books, Inc.
Self-Check!
Basing on your readings, answer the following questions.
1. Classify employees as to their functions, taxability and employer.
2. What are the relevant forms to be filed in connection to compensation income?
3. What items of compensation income are non-taxable?
4. What are the specific items of de minimis benefits and what are their exemption
limits?
5. What is the tax treatment for excess de minimis benefits?
6. What is the exemption threshold for 13th Month Pay and Other Benefits? How is the
excess over that amount treated?
7. What are the items of supplementary compensation?
8. What are the items of regular compensation?
9. To what extent are minimum wage earners exempt on their compensation income?
10. What are the rules on change in status of MWEs?
11. What is the effect of more than one employer, whether concurrent or successive, on
the income tax return of a purely employed taxpayer?

Exercise 10.1 TRUE OR FALSE

Determine whether the following statements are true or false.
___________1. A regular employee is subject to regular income tax only.
___________2. The overtime pay of MWEs is exempt from income tax.
___________3. An employee who became a MWE during the year is exempt from tax for the
entire year.
___________4. The excess of 13th MP&OB over P90,000 is considered as compensation
income.
___________5. The Christmas gift of private employees forms part of “other benefits” while
that of government employees is considered as a de minimis benefit.
___________6. Fixed allowances are supplemental compensation.
___________7. Benefits from productivity incentive schemes are treated as a de minimis
benefit.
___________8. Benefits for the advantage of the employee are exempt from income tax.
___________9. The excess of the 13th MP&OB over the P90,000 is subject to Fringe Benefit Tax
if the employee holds either a managerial or supervisory function.
___________10. The sick leave credit of government employees up to 10 days is exempt de
minimis.
___________11. Only the mandatory amount of contributions to SSS/GSIS, PHIC and HDMF
is non-taxable.
Exercise 10.2 MULTIPLE CHOICE
Choose the best answer from the choices provided.
______1. Which of the following is a taxable compensation income?
a. Separation pay die to resignation
b. Retirement pay under BIR approved retirement plan
c. Separation pay due to disability
d. Terminal pay due to death

______2. Which of the following is a taxable compensation income?

a. Employee share in social security contributions
b. Cost of living allowance
c. De minimis benefits within their limits
d. Separation pay due to closure of employer’s business

______3. Meal allowance is taxable when given

a. For overtime duty
b. In cash
c. For night shift assignment
d. As incentive to all employees

______4. The term ‘de minimis’ does not include

a. Christmas bonus
b. Christmas gift
c. Rice subsidy
d. Monetized unused vacation leave

______5. The P90,000 exemption threshold is applicable for every _______ every _________.
a. employer; annually
b. employee; annually
c. employer; quarterly
d. employee; quarterly

______6. Which of these is an absolute exempt benefit of a minimum wage earner?

a. Holiday pay
b. Vacation pay
c. 13th month pay
d. Excess de minimis benefits
Exercise 10.3 CLASSIFICATION
Classify the following items of compensation income basing on their tax treatments.
A Exempt Benefit D Supplementary Compensation
B De Minimis Benefit E Regular Compensation
C 13th Month Pay and Other Benefits F Subject to Fringe Benefit Tax
______1. Monetized unused vacation leave credits of government rank-and-file employees
in excess of 10 days
______2. Benefits from productivity incentive schemes
______3. Emoluments
______4. Additional compensation allowance of government employees
______5. Personal economic relief allowance of government employees
______6. Fixed transportation allowance of managerial employees
______7. Christmas cash gift of private employees
______8. Profit sharing bonus
______9. Laundry allowances of private employees
______10. Monetized unused sick leave credits of private managerial employees which was
less than 10 days
______11. 14th month pay
______12. Cost of Living allowances
______13. Employee share on Pag-Ibig contributions
______14. Meal subsidy for employee’s family in excess of P2,000
______15. Paid absences where vacation leave credits were applied

Problem 10.1 DE MINIMIS BENEFITS

Mavis, received the following de minimis benefits during the year. She earns P600 daily.
Monetized unused vacation leave credits 12 days
Monetized unused sick leave credits 5 days
Medical cash allowance to dependents P300 per month
Clothing allowance P10,000
Rice subsidy P10,000 per quarter
Actual medical assistance P15,000
Laundry allowance P2,500 per semester
Anniversary gift P7,000
Benefits from Collective Bargaining Agreement P15,000
Determine the taxable de minimis benefits and their treatment given Mavis is a:
Employee Type Rank-and-File Managerial
Government
Private
Problem 10.2 13TH MONTH PAY AND OTHER BENEFITS
Jonathan, a purely employed taxpayer, received the following during the taxable year.
13th Month Pay (Midyear Bonus) 48,000
14th Month Pay (Yearend Bonus) 48,000
Christmas Gift 5,000
Taxable de Minimis Benefits 20,000
Determine the taxable 13 Month Pay and Other Benefits given that Jonathan is a:
th

Employee Type Rank-and-File Managerial

Government
Private

Problem 10.3 MINIMUM WAGE EARNER

Mang Ben became a minimum wage when the statutory minimum wage effective July 1
matched his current salary rate. He received the following benefits during the year.
Jan-Jun Jul-Dec
Basic Pay 75,000 75,000
13th Month Pay - 12,500
Holiday Pay 2,000 -
Taxable De Minimis Benefits 15,000 18,000
Overtime Pay 6,000 8,000
Honorarium 10,000 -
Compute for the following:
___________1. Gross Compensation Income
___________2. Non-Taxable Compensation Income exclusive of the P250,000 threshold
___________3. Claimable portion of the P250,000 Exemption Threshold
___________4. Total Non-Taxable Compensation Income
___________5. Income Tax Due

Problem 10.4 CONSOLIDATED INCOME TAX RETURN

Miss Ligaya Calungcutan resigned on her previous job on Saddy Company effective May 31 of
the taxable year. She was hired in Joy Company on June 2. The following are the benefits she
earned from both employers.
Saddy Joy
Basic Pay, net of P4,500 deductions 165,000 248,500
Prorated 13th Month Pay 15,600 23,400
Taxable De Minimis Benefits 10,000 27,000
Christmas Bonus - 15,000
Other Supplementary Compensation 20,000 32,000
In the Form 2316 it prepared, Joy Company was not able to report the benefits received by Miss
Ligaya from Saddy Company. In addition, both companies withheld income taxes only to the
extent of taxable benefit it gave to Miss Ligaya.
Fill out the table below by computing the figures to be reported on the relevant forms.
Employee Type 2316 (Saddy) 2316 (Joy) 1700
Gross Compensation Income
Non-Taxable Compensation
Taxable Compensation Income

Problem 10.5 COMPREHENSIVE

Miss Ma. Dolly Rigat, a private employee, obtained the following benefits from her
employment during the year.
Basic Pay, gross of P74,000 mandatory deductions P 780,000
13th Month Pay 65,000
Monetized Unused Vacation Leave Credits (8 days) 26,000
Monetized Unused Sick Leave Credits (2 days) 6,500
Uniform Allowance 15,000
Christmas Cash Gift 10,000
Benefits under a Productivity Incentive Scheme 20,000
Rice Subsidy 35,000
Laundry Allowance 5,000
Medical Assistance 10,000
Overtime Pay 16,000
Cost of Living Allowance 30,000
Holiday Pay 10,000
Determine her taxable compensation income before the P250,000 exemption assuming she is a:
_____________1. Supervisory employee
_____________2. Rank-and-File employee